Lok Sabha Elections: Avendus Capital Sees BJP Gains In South And East India

Andrew Holland: I think so. I mean, the market had those jitters, a few weeks back on the low voter kind of outcomes at that time, but then obviously it increased. So markets have recovered from that jittery kind of viewpoint and now you know, you'll see more and more brokers come out with more positive views on where it could end. I think the market hasn't really had that pre-election rally. I think, you know, if the numbers turn out to be where the market is expecting, then I think you could still have that catch up game with all the rest of the global markets, which have been hitting new highs. So I think there's still that extra leg for the market to go. You mentioned the RBI. This is just huge and I don't know why the markets are not picking up on this for the Banking sector, for Construction companies. It's going to bring bond yields down with the bond inclusion with JP Morgan in June. This is liquidity that's been thrown in the market. So I just read a few reports today. So will the government reduce the fiscal deficit with this money? Will they spend more money? What a great problem to have, it is huge. I mean should they have, they can do whatever they want. The key is no one was going to say the fiscal deficit was bad before. So why did they need to do that? They will just spend.

Andrew Holland: Of course. Why wouldn't they? It's going to get that animal spirits with the private sector as well to start doing their own capex. The private capex will start to pick up this will have a huge multiplier effect across the economy.

Nandik Mallik: I think markets are not factoring in somewhere around 400, a lot of noise has been made that maybe the numbers are lower. So I think the market is factoring in a slightly modest victory for the incumbents. In my framework, however, 2019 seems to be a tougher election than 2024. The reason is, the key state of UP did not have the alliance this time. Last year you had SP-BSP fighting together, and even then the ruling party had 80% seats over there. This time the alliance is not there. Another key state you have in the South, Karnataka JD(S), was with Congress. This time JD(S) is with BJP. So the starting point alliances are with the ruling front now. Even in Bihar, I think the alliances are better for the ruling alliance as compared to the opposition. So that's factor number one. Factor Number two is we have three state elections in which the media forecast was that the opposition would do well, but ultimately the ruling party came back three-zero. So you have these factors, you know.

Nandik Mallik: So people are focusing on Maharashtra rightly so because after UP,  it's the second-largest state, in terms of the number of seats in Lok Sabha. Interesting point which very few people have analysed till now is that BJP is contesting on 28 seats in Maharashtra and many of your audience will be surprised that of these 28 seats. BJP is in a direct contest with Shiv Sena- Uddhav Thackerey on five seats only. So technically on 23 seats, it's a BJP versus Congress or BJP versus NCP- Sharad Pawar contest and you know what the strike rate is when BJP and Congress contest against each other. So that's why Maharashtra also may not be as bad, if I can leave it at that.

Nandik Mallik: So if we divide the country into two parts, the North and the West, and then the East and the South. The general consensus is the ruling party is doing better in the Eastern belt and the Southern belt and there could be some losses in the North and the West. So broadly, if you do these maths together, I don't see how the numbers of 2024 will be very different from the numbers of 2019. See, Bengal is a very tricky state because it's basically two fronts contesting against each other. What will matter is whether the Left has any vote share left. So if the Left increases its vote share. Then you know then dynamics could be slightly different. But again, last time they had 18 seats,the ruling coalition. Don't see them getting below 18 at least. So you know, and everywhere it seems even the people who are saying that in the North and the West, there could be some losses. The consensus view is that in Bengal, there could be some gains. 

Nandik Mallik: Andhra is very interesting because Andhra Lok Sabha elections happen together with the Assembly elections.

Nandik Mallik: So the argument about voter turnout being low. It's been uniform throughout the country in the initial phases. So it's not that in the areas in which the ruling party's stronger turnout was low. If you look at Kerala, for example, it's been the lowest turnout in the last 40 years. Now, that kind of directs that, you know, it's not only in the States or areas where the ruling party is strong that there was a fall in the vote share. So because of which I'm not able to say with a fair degree of conviction that you know, this particular drop in vote share is pointing towards one side or the other.

Nandik Mallik: I don't think markets will take it negatively if the incumbents come back to power. So as of now, I think what the market is priced in is somewhere around 300 for the (National Democratic) Alliance as such.

Andrew Holland: Yes.. Anything above that would be a positive for the market.

Andrew Holland: It will be a little early. Next week, we'll kind of decide on how we want to play all of that. So this week is this week and, you know, I think the markets are showing you that there's some confidence that things are going to be better than they were two weeks ago at least. I think the other thing to really kind of think about is all of this selling by foreign investors. If the incumbent government comes in, then the two things that will happen, one will say okay, what's the first 100 days going to look like and I think they're just going to spend because we've now got this windfall from RBI. You have interest rates coming down because the Bond yields will fall, which is good for banks. That's your biggest short in the market is Banks. If that turns around that's just huge. We've seen that in the results, the NIMS are towards the bottom of the worst case scenario now. Things will only get better. So the banking sector will be the one that leads the whole market higher, is my view.

Andrew Holland: So you had that huge rally at the end of November after the state elections, which took us some of that pre market rally, it's a pre-election rally away from us because usually you have that kind of thing just a few months before. Then you had those jitters in between and then the markets are saying okay, we'll wait, now we're okay to just wait and see what the results are. We're okay. We think that's going to happen, the government will come in and policies will be the same. I know you have this windfall from the RBI. So you have that extra leg  for the market to move higher. If these results can be the way we think they're going to come.

Andrew Holland: After the elections, we're all going to focus only on one thing, which we do every year and anyway, is the Budget and that's why I think no worries are going to start creeping in about capital gains tax being increased. We think, you know, there could be some movement in arbitrage funds in terms of taxing them in the bank. So target fixed deposits and you got an instrument which is tax like equity, but it's a risk like a bond, free risk instrument. So we think there'll be changes. Market might not like anything to do with capital gains tax increases.

Andrew Holland: So there's been last in the last budget in February there were a lot of rumours going around that they are going to reduce personal Income tax, so everyone benefits, but increase capital gains tax because it's a smaller amount of people who will be affected.

Nandik Mallik: So I'm in the same camp. The reason is, they'll do something in the budget to take stress away from the low growth in bank deposits. So every year the amount of deposits which you have in the system is somewhere around Rs 2 crore crores. So the incremental amount which comes every year is somewhere around 10% of that 10-15% around Rs 20 lakh crores. Now, for example, arbitrage funds which Andrew mentioned. Technically, they are short-term funds only but they have a much better taxation, for almost zero risk in the portfolio. Now, if taxation around that for example, remains where it is, the industry has grown from Rs 50,000 crores to Rs 2 lakh crores in one year and I’m very sure the growth in the next year will be from two lakh crores to five lakhs, six lakh crores, you know so that incremental three to four lakh crores will come from deposits and that will put some pressure on bank deposits, if this doesn't happen. So I think it's a low hanging fruit, how they do it, how they do the definitions is a different thing altogether. But taking a step back you mentioned about you know, we talking about one day each and then elections are ten days away.. The reason is nowadays most of the volume which happens in market happens in index derivatives and that too in the weekly option expiry segment.

Nandik Mallik: No, cash volumes have been the same only. Cash volumes haven't come down per se, but that volume has gone up a lot. So that is the reason why, let's say 20 years back, if you were a fund manager, then you would have to act before the event happens. Now, we don't have to actually do that because the volume in that segment is so huge, that you know, we can see how the news flow is happening, how the information is panning out, we can always adjust to new data points and then take positions, even large positions can be built and unwound very quickly in that segment.

Andrew Holland: Not 10 days in advance. If you are doing stocks, you say okay, if the government comes in, would they spend money, should I be in infra stocks, which sectors will be the big beneficiaries? 

Nandik Mallik: So I believe that you know, what next part, a lot of FIIs may have lightened their position, not just because of Indian elections, but also because China is cheaper. So you have two events happening simultaneously, China also turned cheap and together with that we are the Indian elections. So you know, if you're a fund manager managing, let's say, a multi-asset portfolio, then you have to show some risk management. So they may have lightened the position because of which earlier we were mentioning if it's a 325-350 kind of a number, there could be some sharp bounce back and the sector's which will lead will be the traditional segments. So you know, high beta sectors will do well, defence already has done well. If consumption increases, then possibly this time, we may not see an FMCG rally because you know, the valuations already are so high. But you will have a scenario where at least for the next, so after the event, if let's say the numbers are what we are expecting the numbers to be not meaningfully different from 2019. Then you could have the entire pack moving together. It's very tough for me to visualise a particular sector doing extraordinarily well, compared to the benchmark. 

Nandik Mallik: Yes, because banks have underperformed 17-18% In the last 12 months and banks by definition are high beta. So I think banks will and some amount of shorts have been in the banking system. 

Nandik Mallik: No, I think the entire pack will move together because PSUs have done comparatively better in the last 12 months. But then if you go back further, five years, six years, then you know, PSUs haven't done so well. So the pack as such will move up together. If let's say the numbers are there.

Nandik Mallik: So that's why I said the entire pack will move together, yes, they have done well, in the last 12-24 months these these names have done well and people who invest in these names typically don't do profit booking in let's say 12-24 months, you know, so the investors in these kinds of stocks are there for the long haul. So you may not see profit booking also in these kinds of names.

Andrew Holland: On the banking sector, just to add, on the PSU banks in particular. It's to my mind, it's always a part of the sector which I like to kind of rent not own in particular, but if bond yields are falling, which I think they will, then the huge bond portfolio these banks have, is just an extra kind of reason to buy, because of the profits they make and that gives them more liquidity and more money to kind of lend to companies. So this is obviously in the markets just not picking up at the moment because there's been so much selling by foreign investors in banking to really fund their China move. China is a very simple story, I mean, it is bottoming out. So there's that big fear of missing out on a very cheap market and India is just being used as a funding vehicle to do that in the short term.

Andrew Holland: I think the PSU lends itself to you know, if you take the Defence, some of the Renewables, it lends itself to those PSU companies. So there's no real kind of other companies, private, multinationals which you can play in. On Infrastructure, I think I've always taken the decision that do you want to be in the, you know, the real kind of roads and bridges type of building which is low margin, or do you want to be in the smart cities, smart manufacturing, Railways type of, you know, spending, and that's where you've seen those multiples rise because the margins, I mean, you know, those come into companies in particular, but Siemens and ABB, it was a knockout pair of results. I mean, they were huge and of course, your earnings get upgraded and then the first 100 days you're going to see more spending in these companies.  So order books move share prices, execution is the key.

Andrew Holland: It's a combination like, if you've got your own portfolio you'll be saying I want some of the large cap banks, I want some of the mid cap and some of the kind of NBFCs on new-age kind of financials and you put you know, maybe 70 towards your your larger banks and then skew it down to maybe you know, 10% towards the New Age banks, which are coming through. So, that's the way you can play it in terms of the portfolio stands. But I think you've got to be with the big banks, because that's where you're going to get the extra bang for your buck / book, when you invest there because if all underperformed. There's a huge short covering to come and if bond yields do it's an extra bonanza for them.

Nandik Mallik: So the funniest argument which I have heard is, you know, in 2004  also, the ruling party won those three States, Rajasthan, Chhattisgarh and then they came into elections. This time also they have won the three states and in 2003, Australia won the World Cup beating India and in 2023 Australia has beaten India in the World Cup. So I think the numbers are fairly comfortable, even if the 2019 numbers in hindsight look, it was a wave election. But if you go and look at the videos of all the big anchors before 2019, even they were trying to make a contest.

Nandik Mallik: It's really tough for me to visualise that they do well in states, but they do badly in the Centre, because I think people vote nationally at Centre elections. The best example I can give is UP. People only focus on 2014 and ‘19. But in 2009 also UP gave Congress 21 seats. Congress winning 21 seats in UP is a big thing in 2009. So the last three election cycles, the biggest state in India has followed the national pattern. So in my framework, it's tough to believe that you know, local issues dominate national elections in the Lok Sabha.